In the wake of October’s Autumn Budget, there has been plenty of media coverage about the financial impacts of the Chancellor’s announcements. The one that has come under particular scrutiny was the hike in National Insurance Contributions (NICs) for employers, and the possible implications for the UK economy.
If you’re an employer, you’re probably familiar with the NICs hike and what it might mean for your company. If you’re not an employer or business owner, you may think that the increase is unlikely to affect you.
While understandable, the reality could be very different. Read on to discover why the higher rate of NICs for businesses may have financial implications for you as an employee and consumer. Before you do, let’s look at the increase in more detail.
Employers NICs will rise significantly while thresholds plummet
In the run up to July’s general election, Labour pledged not to increase the headline rate of NICs, Income Tax, and Value Added Tax (VAT). To keep her promise while raising much needed funds to boost the UK’s coffers, the Chancellor raised the tax for businesses and not individuals.
As such, Class 1 NICs, which are paid by businesses for its employees, will rise to 15% for anyone earning more than £5,000 a year, as from April 2025. This is a substantial increase from the 2024/25 rate of 13.8% for anyone earning £9,100 a year or more.
Because the drop in threshold means a larger portion of wages will be subject to the higher rate of NICs when it comes into force, it’s going to hit business’s bottom line. Consequently, there will be indirect implications for workers and consumers, something we will consider now.
Wage rises could be squeezed – or stop altogether
In November, the BBC revealed that an Office for Budget Responsibility (OBR) report suggested that most employers will pass the cost of the NICs increase on to their employees. The OBR, which is the UK’s official economic forecaster, said business will do this by restricting salary increases or stopping them altogether.
Indeed, the report states that the OBR estimated that ‘most’ businesses would use lower wages as one way to pass the cost of the NICs increase to workers. If the prediction proves to be correct, it means the Chancellor’s announcement could have significant implications for millions of employees' finances.
The price of goods and services will increase
In November, a group of Britain’s largest retailers warned that the price of goods would rise as a result of the Autumn Budget. One of the key reasons for this was the Class 1 NICs hike.
According to media reports, businesses including Tesco, Sainsbury’s and Amazon UK warned that price increases would be necessary to help businesses deal with the increased costs created by the Chancellor’s announcements.
An increase in the price of goods and services could also mean the UK starts to see inflation, which measures the long-term rise of goods and services, go up again. Inflation hit the headlines in recent years when it soared to 11.1% in October 2022, the highest it had been since 1981.
At the time, high food and energy prices were blamed for the increase. While it then fell to below the Bank of England’s target rate of 2%, official figures show that it jumped up to 2.3% in October 2024 from 1.7% the month before.
If inflation does soar again as a result of the budget announcement, it could devalue your money in real terms. To demonstrate this, you may want to consider the BoE’s inflation calculator.
It reveals that you needed £176 in October 2024 to have the same spending power as £100 in October 2004. This means your money had to grow by nearly 75% during the period just to keep pace with inflation. If it didn’t your money would have lost value in real terms.
Investing could help to inflation-proof your money
There could be some good news though, as investing could help you to inflation-proof your money if prices increase as the OBR expects. Historically, the stock market has tended to outperform cash savings over the long-term, which could help to shield your money from its effects.
According to an article in This is Money, the 2023 Barclays Equity Gilt Study found that shares provided a real average annual return of 2.9% during the 20 years leading up to 2022. This compares to cash’s -1.1%.
The study tracked the nominal performance of £100 invested in cash, bonds or shares between 1899 and 2022. As such, investing your money might be an effective way to expose your cash to potential growth over the long-term and shield it from inflation.
That said, always remember that past performance is no guarantee of future performance and the value of investments can go down as well as up.
The NICs hike may not be the only announcement you need to be aware of.
The indirect financial effects of the Class 1 NICs increase are likely to be felt by households across the UK. Yet there was another, unexpected, announcement that could also jeopardise your wealth over the long-term: that unused pensions would become liable to Inheritance Tax (IHT) after April 2027.
As a result, millions of families could be exposed to a higher IHT tax charge, or be liable to the tax for the first time. Both of these scenarios could result in loved ones receiving significantly reduced amounts from the estate.
If you’re one of them, you may want to join our webinar on Thursday 5 December at 6pm. In it, former BBC presenter Mark Foster will be joined by AFH’s trusts and estates expert, Malcolm Noblett, and Chief Advice Officer Austin Broad to demystify ways you might be able to mitigate, or even negate, an increased exposure to IHT.
To register for the easy to follow and informative webinar, entitled Safeguarding your pension from the Autumn Budget tax changes, fill in the registration form at the top of the page.
Get in touch
If you would like to discuss how the announcements made in the Autumn Budget might affect your finances, please call us on 0333 010 0008, as we’d be happy to help.
Thursday 28 November 2024